19. (a) What are the circumstances under which the Inland Revenue Department can make jeopardy Assessment of tax? [8] (b) Describe the instalment method of tax collection as per the Income Tax Act,…

(a) Circumstances Under Which the Inland Revenue Department Can Make Jeopardy Assessment of Tax

The Income Tax Act, 2058 (2002) provides provisions for jeopardy assessment under Section 50 to prevent tax evasion and ensure timely revenue collection. Jeopardy assessment is an emergency assessment made when there is a risk of loss of tax revenue due to fraudulent or evasive practices by taxpayers.

Conditions for Jeopardy Assessment

The Inland Revenue Department (IRD) can make a jeopardy assessment under the following circumstances:

1. Risk of Tax Evasion or Fraud

   • If there is reasonable belief that the taxpayer is intentionally concealing income, understating assets, or overstating deductions to evade tax.
   • Example: A taxpayer destroys books of accounts or transfers assets to avoid assessment.

2. Taxpayer’s Non-Compliance with Assessment Process

   • If the taxpayer fails to submit required documents (e.g., financial statements, tax returns) within the stipulated time.
   • If the taxpayer refuses to cooperate with the assessing officer during an audit.

3. Taxpayer’s Attempt to Leave Nepal or Hide Assets

   • If the taxpayer intends to leave Nepal permanently without settling tax liabilities.
   • If the taxpayer transfers assets abroad or converts them into cash to avoid assessment.

4. Destruction or Tampering of Records

   • If the taxpayer destroys, alters, or hides accounting records (e.g., invoices, bank statements, ledgers) to mislead the assessing officer.
   • Example: A businessman burns his sales records before an audit.

5. Taxpayer’s Insolvency or Bankruptcy

   • If the taxpayer is declared insolvent or facing bankruptcy, and there is a risk that tax dues will not be recoverable.
   • Example: A company files for bankruptcy before paying pending taxes.

6. Taxpayer’s Failure to Pay Advance Tax

   • If the taxpayer fails to pay advance tax as required under Section 58 of the Income Tax Act, and there is a high probability of non-payment.

7. Taxpayer’s Use of Shell Companies or Fake Transactions

   • If the taxpayer creates fake transactions (e.g., through shell companies) to underreport income.
   • Example: A taxpayer shows lower profits by inflating expenses through fake invoices.

8. Taxpayer’s Non-Cooperation with IRD

   • If the taxpayer refuses to provide necessary information or obstructs the assessment process.
   • Example: A taxpayer denies access to bank records during an audit.

Procedure for Jeopardy Assessment

1. Notice of Jeopardy Assessment

   • The Assessing Officer (AO) issues a notice under Section 50 stating the reason for jeopardy assessment.
   • The notice must specify:
     • The tax period under assessment.
     • The estimated tax liability.
     • The right of the taxpayer to appeal within 30 days.

2. Estimation of Taxable Income

   • The AO estimates the taxable income based on:
     • Available records (partial books of accounts).
     • Market trends (comparable businesses).
     • Previous years’ returns (if applicable).
     • Information from third parties (banks, suppliers, customers).

3. Demand Notice

   • After estimation, a demand notice is issued, requiring the taxpayer to pay the estimated tax within 30 days.
   • If the taxpayer fails to pay, the AO can initiate recovery proceedings (e.g., attachment of assets, bank accounts).

4. Final Assessment

   • After the jeopardy assessment, a regular assessment is conducted.
   • If the final assessment is less than the jeopardy assessment, the excess amount is refunded.
   • If the final assessment is more, the taxpayer must pay the difference.

Rights of the Taxpayer in Jeopardy Assessment

• Right to Appeal: The taxpayer can appeal to the Commissioner (Appeals) within 30 days of the jeopardy assessment notice.
• Right to Present Documents: The taxpayer can submit additional evidence to justify their financial position.
• Right to Legal Representation: The taxpayer can hire a chartered accountant or lawyer to assist in the assessment process.

Example of Jeopardy Assessment

Case: Mr. Ram Prasad, a businessman, is under audit for the fiscal year 2078/79. During the audit, the AO finds that:

• Mr. Prasad destroyed his sales invoices for the last quarter.
• He transferred ₹50 lakh to an offshore account without declaring it.
• His bank statements show cash deposits that are not supported by proper documentation.

Action by IRD:

1. The AO issues a jeopardy assessment notice under Section 50.
2. Based on available records and market benchmarks, the AO estimates:
   • Gross Income: ₹80 lakh (instead of declared ₹40 lakh).
   • Deductions: ₹20 lakh (standard allowance).
   • Taxable Income: ₹60 lakh.
   • Tax Liability (15%): ₹9 lakh.
3. A demand notice is issued, requiring Mr. Prasad to pay ₹9 lakh within 30 days.
4. If Mr. Prasad fails to pay, the IRD can attach his bank accounts or business assets.
5. After a detailed assessment, if the actual taxable income is found to be ₹55 lakh, the final tax would be ₹8.25 lakh, and the excess ₹0.75 lakh would be refunded.

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(b) Instalment Method of Tax Collection Under the Income Tax Act, 2058 (with Example)

The Income Tax Act, 2058 provides for the payment of taxes in instalments under Section 58 to facilitate cash flow management for taxpayers, especially businesses with large tax liabilities. This method is mandatory for certain taxpayers and optional for others, depending on their tax liability and financial capacity.

Eligibility for Instalment Payment

The instalment method applies to:

1. Companies (as defined under the Company Act, 2063).
2. Firms (partnerships) with taxable income exceeding ₹5 lakh.
3. Individuals and HUFs with taxable income exceeding ₹2 lakh (if the assessing officer allows).
4. Taxpayers whose tax liability exceeds ₹50,000 in a fiscal year.

Conditions for Instalment Payment

• The taxpayer must file a tax return within the due date.
• The total tax liability must be paid in instalments as per the schedule prescribed by the IRD.
• Interest is charged if instalments are not paid on time (currently 12% per annum under Section 66).
• Penalty may apply for default in payment (up to 10% of the unpaid tax).

Schedule of Instalment Payments

The Income Tax Rules, 2067 prescribe the following instalment schedule:

(Note: The exact percentages may vary based on IRD notifications.)

Procedure for Instalment Payment

1. Assessment by AO

   • The Assessing Officer (AO) completes the tax assessment and issues a tax demand notice.
   • The notice specifies the total tax liability and the instalment schedule.

2. Payment of Instalments

   • The taxpayer must pay the instalments as per the due dates mentioned in the notice.
   • Payments can be made online (via e-payment) or through bank challans.

3. Interest on Late Payment

   • If any instalment is not paid on time, interest at 12% per annum is charged from the due date until payment.
   • Example: If the first instalment (₹30,000) is paid 10 days late, interest = ₹30,000 × 12% × (10/365) ≈ ₹98.63.

4. Final Settlement

   • After all instalments are paid, the tax liability is considered settled.
   • If the taxpayer fails to pay any instalment, the IRD can initiate recovery proceedings (e.g., attachment of assets, bank accounts).

Example of Instalment Payment

Case: Mr. Hari Prasad, a company owner, has a taxable income of ₹50 lakh for the fiscal year 2078/79. The total tax liability (at 25% corporate tax rate) is:

$$\text{Total Tax}=₹50,00,000\times 25\%=₹12,50,000$$

Instalment Schedule:

Scenario 1: All Instalments Paid on Time

• Total Paid: ₹3,75,000 + ₹5,00,000 + ₹2,50,000 + ₹1,25,000 = ₹12,50,000 (No interest).

Scenario 2: First Instalment Paid Late (10 Days)

• Interest on ₹3,75,000 = ₹3,75,000 × 12% × (10/365) ≈ ₹1,230.14
• Total Paid: ₹3,75,000 + ₹1,230.14 + ₹5,00,000 + ₹2,50,000 + ₹1,25,000 = ₹13,51,230.14

Scenario 3: Second Instalment Not Paid

• Interest on ₹5,00,000 = ₹5,00,000 × 12% × (30/365) ≈ ₹4,931.51
• Recovery Action: IRD may attach bank accounts or initiate legal proceedings.

Advantages of Instalment Payment

✅ Reduces cash flow burden for businesses. ✅ Avoids penalties if paid on time. ✅ Prevents interest accumulation if managed properly. ✅ Encourages tax compliance by spreading payments.

Disadvantages of Instalment Payment

❌ Interest is charged if instalments are delayed. ❌ Penalties may apply for non-payment. ❌ Complexity in tracking multiple due dates. ❌ Risk of asset attachment if payments are missed.

Key Provisions Under Income Tax Act, 2058

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